On October 2 and 3, Kazakhstan's capital
hosted an annual gathering of the Kazenergy
Association, which is comprised of 50 of the
biggest players in the oil and gas sectors as well
as the non-hydrocarbon sector, including foreign
and domestic companies.

The association
was created back in November 2005 and has the
status of a not-for-profit membership organization
working to create favorable and dynamic investment
opportunities for the thriving energy industries
in Kazakhstan (Kazenergy, official website).

Simultaneously, the 20th edition of the
Kazakhstan International Oil & Gas Exhibition,
commonly known as KIOGE, was launched in Almaty.
This year, it features exhibits of almost 550 companies

from 23 countries,
providing about 25% of its total exhibition space
to new entrants on the Kazakh energy market
(KIOGE, September 27).

Speaking at the
opening of the 7th Eurasian Forum, which
traditionally serves as a framework for
Kazenergy's annual meetings, the new Kazakh Prime
Minister Serik Akhmetov confirmed his country's
intention to further diversify its energy projects
by developing intensive oil refining technologies.

He also commented on the Kazakh
government's commitment to the diversification of
energy export routes and prospective customers
(Kazinform, October 3). Moreover, Kazakh
authorities are currently implementing a
large-scale program of modernization of existing
refineries whose primary purpose is to fully
satisfy the local demand for gasoline in a
country, which still has to import much of its
refined oil from Russia.

According to
Lyazzat Kiinov, the chairman of Kazakhstan's
national oil and gas company KazMunaiGaz (KMG),
the government is expecting to attract more than
US$6 billion worth of investment to modernize
three of its oil refineries located in the west
(Atyrau), north (Pavlodar), and south (Shymkent).

The upgrading of these facilities may
require several years of close cooperation with
foreign partners and is currently scheduled to be
completed no later than 2015. The renovation of
the Atyrau, Pavlodar and Shymkent sites would
presumably increase their annual output to 19.5
million tons, while the intensity of oil
processing is slated to reach the level of 90%
(Tengrinews, October 2).

By means of such
measures, Kazakhstan should be able to produce its
own gasoline in conformity with the European
Union's Euro-4 and Euro-5 quality standards. At
the same time, the Nelson complexity index (which
is an internationally recognized measure of the
secondary conversion capacity of an oil refinery
relative to its primary distillation capacity) of
Kazakhstan's refineries is expected to surpass the
symbolic threshold of 10, which generally
corresponds to the US and European industries
(Tengrinews, October 2).

As for Russia,
its Nelson complexity index remains relatively low
and, according to the Russian ministry of energy,
did not exceed 4.4 in 2011 (Global Technology
Forum, October 11, 2011).

The Atyrau
refinery, which is 99.5% owned by one of KMG's
subsidiaries, has been the first to enter into
formal negotiations with foreign partners. In
December 2011, it signed a cooperation agreement
with an international consortium comprised of
China's Sinopec Engineering, Japan's Marubeni
Corporation and Kazakhstan's subcontractor
KazStroyServis.

The total cost of the
project is estimated at almost $1.7 billion. Later
in June 2012, a delegation of the Atyrau refinery
visiting Beijing formalized a $1.13 billion loan
on behalf of China's EXIM bank, with the repayment
period extending over thirteen and a half years
(Newskaz.ru, June 6).

The chairman of the
Kazenergy Association, Timur Kulibayev, also
informed the audience that the first Kashagan oil
would be produced in March 2013, as the members of
the North Caspian Operating Company (NCOC) had
previously agreed to start exploratory operations
earlier than expected (Kazinform, October 2).

In his turn, Kazakhstan's Oil and Gas
Minister Sauat Mynbayev confirmed widely
circulating rumors about the intention of
ConocoPhillips, which owns an 8.4% stake in the
NCOC, to sell its share in the Kashagan project to
the remaining shareholders.

While it was
previously reported that both the ExxonMobil
Corporation and Royal Dutch Shell plc may be
seeking to buy out Conoco's stake, together with
the extension of their operatorship agreement with
Kazakhstan for another 20 years, KMG's chairman
Kiinov unexpectedly confirmed his company's desire
to take over from Conoco. In such an eventuality,
KMG could become the largest shareholder, as its
stake of participation would increase to 25.21%,
while Eni, Total SA, ExxonMobil and Shell would
continue to own 16.81% each.

As Mynbayev
explained to Kazenergy members, the Kazakh
government and its national company have a
preemptive right with regard to any purchases in
strategic energy projects (Businessweek.com,
August 30; Kommersant.ru, October 2).

According to KMG estimates, Kazakhstan is
in the world's top 10 oil-rich countries and ranks
second after Russia in the CIS. Its proven oil
reserves amount to 40 billion barrels and gas
reserves are close to three trillion cubic meters.
In terms of oil production, the country ranked
15th globally in 2011. By implementing its
long-term development strategy (2011-2022), KMG
expects to become one of the 30 largest oil
producers in the world over the next two years
(Kazinform, October 2).

Georgiy
Voloshin is an analyst at The Central
Asia-Caucasus Institute & Silk Road Studies
Program of John Hopkins University and a
researcher for Wikistrat, a geopolitical
consultancy. He is also an Executive Advisory
Board Member of Paratus Europe Ltd., a strategic
management and business consulting firm.